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Good morning. Greetings, and welcome to the Fastenal Company 2025 Q3 Earnings Results Conference Call. At this time, all...

A question and answer session will follow the formal presentation and you may be placed into the question queue at any time by pressing star one on your telephone keypad. We ask you please ask one question and one follow-up to return to the queue. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dre Schreiber, Director of Investor Relations. Please go ahead, Dre. Welcome to the Fastenal Company 2025 Third Quarter Earnings Conference Call.

This call will be hosted by Daniel Florness, our Chief Executive Officer, Jeffery Watts, our President and Chief Sales Officer, and Sheryl Lisowski, our Interim Chief Financial Officer, Chief Accounting Officer, and Treasurer. The call will last for up to one hour and we'll start with a general overview of our quarterly results and operations with the remainder of the time being open for questions and answers. Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission, or distribution of today's call is permitted without Fastenal's consent. This call is being audio simulcast on the Internet via the Fastenal Investor Relations homepage investors.fastenal.com. A replay of the webcast will be available on the website until 12/01/2025 at midnight central time. As a reminder, today's conference call may include statements regarding the company's future plans and prospects. These statements are based on our current expectations, and we undertake no duty to update them. Important to note that the company's actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings release and periodic filings with the Securities and Exchange Commission, and we encourage you to review those factors carefully. I would now like to turn the call over to Mr. Jeffery Watts.

Thank you. Good morning, everyone, and thank you for joining us today. To start, Q3 was a strong quarter, and more importantly, it was a consistent one. We delivered double-digit growth, we expanded margins, and continued to gain share in a flat market. Now that's not easy to do, and it speaks to the strength of our strategy and the execution of our teams. But before jumping into it, I'd like to extend a big thank you to our entire Blue team for their hard work this quarter. When I travel to branches and onsites and DCs, I'm always struck by the pride and energy in our people, and I'm happy to say that Fastenal's culture of service, the legacy Bob left us, is alive and well. So to every employee, thank you for your focus and commitment, the work you do every day in front of our customers and behind the scenes is what's really driving this performance. Also, to all of our employees up in Canada, I just want to wish them a happy Thanksgiving, and I hope you're getting to spend some quality time with your friends and family. Now let's get started and turn to slide number three. In the third quarter, we delivered net sales of $2.13 billion, which is an 11.7% increase over Q3 of last year. This is our second consecutive quarter above the $2 billion mark, which demonstrates the effectiveness of our plan and Fastenal's growing partnership with our customers. It's also worth mentioning that the growth this quarter came with the same number of selling days, so it's a clean comparison. Overall, again, it's a strong result. Let's discuss the cadence of the growth through the quarter. You know, one thing we pride ourselves on at Fastenal is solid execution quarter in and quarter out, and Q3 is a good example of this. Despite a couple of timing quirks, we pretty much met or beat our typical seasonal patterns each month. In July, we saw daily sales growth of 12.8% with a sequential dip from June of about 2.7%, and that's actually better than our historical benchmark, which typically sees about a 3.5% drop from June. So July came in stronger than expected. Now one nuance here is the timing of the July 4 holiday, and it landed on a Friday this year, which is important as it pulled some activity into that July.

The fall on a Wednesday or Thursday, kind of like it did last year, we wouldn't see that same activity. And our vending data confirmed this. We saw about an 8% increase in vending activity that week compared to when the holiday falls midweek. Didn't materially impact the quarter, but it did shift some intermonth cadence. When you add in what we saw in August and September, you know, our Q3 daily sales growth actually came in a bit stronger than our benchmark would have predicted. That was around 11.2%, which is an encouraging sign. And looking at the year-to-date picture, you know, our daily sales from January through September, they're up 15.9% compared to a historical benchmark of about 9.5%. Now that's a big delta, but even when we consider the weather-related issues stated in January, and the price cost through September, we're still showing double-digit sequential growth well ahead of our historic pattern.

I think the big takeaway is our underlying growth remains strong and steady. You know, we have a phrase we use internally: Plan the work and work the plan. And the team did exactly that in Q3, and it shows in the results. When we're looking at where the growth came from, the broader market wasn't much help.

Now the industrial economy remained sluggish, essentially flat. I think the PMI averaged about 48.6 in the quarter. Indicates contraction, but I think I'd characterize our growth as mostly self-help and share gains rather than any particular macro lift.

Pricing did contribute roughly 2.5 percentage points to growth. Somewhere in that 240 to 270 basis points, a bit lighter than we anticipated earlier in the year. But I think Sheryl's gonna dive into this in a little bit more detail later in the presentation. I would just add, though, that, you know, our team has done an excellent job communicating with customers on pricing. You know, the one thing I hear consistently from customers is appreciation of Fastenal's transparency and partnership in managing these cost changes. And we're not just passing on increases. We're working side by side with our customers to find solutions or alternatives and efficiencies. That kind of responsiveness, it builds trust, and it's a big reason we're continuing to gain share. Aside from price, the rest of our growth, roughly eight to nine points, came from volume and share gains. We saw meaningful wins with key accounts, you know, a steady stream of new contract signings, and deeper penetration in existing accounts. Our national accounts and on-site signings over the past year are now ramping up in revenue, and it showed this quarter. Slightly higher than the company, reflecting those new contracts really coming into fruition.

In fact, our national account sales were up double digits in Q3, and we turn to slide four. You know, in terms of our customer category results from our strategy, and we continue to see success with large accounts. Our aim has been to deepen relationships with big customers and in Q3, it showed. The number of active customer sites spending over $10,000 per month with us, those sites grew over 8.1%. And those spending over $50,000 per month, what we call on-site-like locations, the number of those sites grew 15.4%. Those are significant gains in penetration. In fact, some long-standing customers are now utilizing us in more plants for more product categories than ever before. And I was just down in Texas for some regional VP meetings, and I had a regional tell me a story. You know, one of a major manufacturer in this area has been a Fastenal customer for twenty years. Just expanded Fastenal's program from two sites with them to five sites, essentially making us the primary supplier nationally. And that didn't just happen by accident. It was our team proving themselves, offering new solutions and new product lines. It's a great example of earning more with existing customers by enhancing our services. Also wanted to highlight the growth we're seeing in what we call nontraditional markets, and that speaks to expanding our total market. In the quarter, for example, our business with healthcare, education, and government customers grew nicely, and our sales to warehousing and logistic companies, you know, they were up significantly. These segments are outside of heavy manufacturing, they help diversify our base. We've also signed several new on-site contracts with school districts this year, and it's an area we targeted after the pandemic. Those are now kicking in and contributing to growth and the resilience in our mix. Now as Dan noted, earlier in the year, institutions and warehouses, they may not boom like but they don't bust as hard either. I'm paraphrasing. So bringing them into the fold makes us a stronger company long term. Bottom line is our strategy is delivering. We set out to align the organization behind those three pillars: increasing sales effectiveness, enhancing our services, and market expansion. In Q3, we can see tangible results. Faster growth in our core product fasteners, more spend from big customers, and entering new pockets of business. Moving on to slide five. When I look at slide five, a few takeaways from me on this slide. The first is we continue to speak about alignment in our strategy, but most of that has been around just our sales departments. I think it's important to point out that this is a company-wide strategy. It's very important. And our fastener expansion initiative, you know, is a good example of this. This was a company-wide effort, not just a product push, but a coordinated strategy across sales, supply chains, and operations. You know, we improved availability in our DCs. We aligned our teams around some key SKUs, and most importantly, we made it easier for our customers to get what they needed. And the result, the fastener sales grew over 15% in September, outpacing overall company growth. It resulted in a meaningful lift in not just sales, but the gross margin as well. This is what company alignment looks like and it's driving results. Second thing on this slide, you know, for me, Q3 was a quarter of profitable growth. We achieved double-digit top-line growth in the soft market. And converted to even faster bottom-line growth, net income up 12.6%, EPS up 12.3%. Our margins expanded and costs were well managed, resulting in a 20.7% operating margin. The scenario that's really the scenario we aim for. The only cost of this success was really higher performance pay, and our team definitely earned that. Definitely not gonna get in the way of that. Now this combination of growth, profitability, and returns is exactly what we set to deliver. It speaks to the strength of our strategy and, more importantly, to the execution of the Blue team. It also gives us confidence as we head into the end of the year knowing that we're growing the right way profitably and sustainably. While creating value for our customers, our employees, and our shareholders. Now moving on to slide six, which highlights our digital engines.

You know, this is an area where we've been investing for years. And in Q3, we saw continued momentum. Averaged about 110 FMI signings per day, slightly below last year's pace, but still an extremely strong level of activity. It's over 7,000 weighted fast bin and fast bin devices signed in the quarter, you know, bringing our total installed base over just under 134,000 devices globally. Up 8.7% year over year. The sales through FMI technology represented 45.3% of total sales in the quarter. This was 43% a year ago, and when you look at the daily sales through FMI, they grew just shy of 18% year over year, well above company average, and the clear sign that, you know, this program is not just expanding. It's accelerating. On the e-business side, we saw 8% growth in daily sales. This includes both e-procurement and e-commerce activity. All this number is not where we want it. We believe the relaunch of fastenal.com will help improve this growth as we move into 2026. When you combine FMI and e-business, our digital footprint accounted for 61.3% of total sales in the quarter, and it reflects our long-term strategy to drive growth through technology, automation, and customer integration. And further, you know, it really furthers our motto of growth through customer service. So before I hand it off, Sheryl, maybe a quick summary. You know, we're winning with large customers. We're deepening customer relationships with technology and on-site. And we're aligning around the right priorities. We did it by investing in the right things. You know, our customers, technology, the development of our people. I'm very proud of the teams and how they've embraced and executed the strategy over the last year. I believe we're really starting to fire on all cylinders. We're aligned. We're adaptive, and we're customer-driven. With that, I'll pass it over to Sheryl.

Thanks, Jeff, and good morning, everyone. Now I'll turn to slide seven. Sales in 2025 were up 11.7%. That's the strongest quarterly daily sales rate since 2023. Despite sluggish end market demand and caution related to trade policy and tariff, margin pressures, government shutdowns, the potential for longer than normal holiday shutdowns in the fourth quarter, due to the Christmas holiday falling in the middle of the week, regional and other sales leadership expectations are generally favorable for continued strong goals due to share gains. In the absence of much external help, the improvement in our sales reflects two other variables. First, even as the market has stabilized, our comparisons have gotten easier. Particularly in the cyclical parts of our business. This factor helped produce our third quarter of growth for fasteners since 2023 and acceleration in manufacturing end markets. Second, contributions from our strong contract signings since early 2024 continue to build. We continue to experience a healthy pace and mix of signings in 2025 and our total national, regional, and government contracts grew in the high single digits. The quarterly sales growth rate is a fair representation of our performance, and we did see acceleration through the period. It was another solid Stealth Health driven result in a soft market. The pricing outlook warrants some discussion. Year to date, significant tariffs have been applied to products from China, as well as steel, including steel-derived products like fasteners on a global basis. We continue our long-term trend on diversifying our supply chain where possible to the size and timing of our suppliers' pricing actions. And we added some inventory to our own balance sheet. That said, supply chains have gotten more expensive and a part of our response over time has been incremental pricing. We have been proactively engaging with our customers for several months. We measure price on the sale of identical parts to the same customers in both periods. This represents approximately 50% of our business, and we've referred to this as like-for-like pricing. During the third quarter, we implemented one pricing in the month of August, which addressed the reciprocal tariffs that were finalized in July 2025. Our previously stated goal was for price to contribute 3% to 5% by the end of 2025. The phased approach to this rollout resulted in 240 to 270 basis points of additional impact in the third quarter with momentum building as we ended the quarter. Additional pricing actions will be necessary in 2025 with the potential to increase the impact of pricing on like-for-like parts to be in a range of 3.5% to 5.5% depending on where the tariff litigation ultimately settles and the pace and execution of our actions. Our revised goal for pricing on like-for-like parts in 2025 reflects the reduction from our previously stated goal of 5% to 8%. The other 50% of parts sold to customers exist in the current period but do not exist in the prior period. Making it hard to measure price impact on that group. That said, it has to be acknowledged that had we sold that part to that customer in the prior period, it would have been likely sold for less due to inflation. Therefore, in periods of inflation, there is an inherent price component that flows into share contribution. It is likely pricing is contributing to share contribution in the range of 1% to 2%. We are encouraged by the easier comparisons, the improved sentiment, and particularly our internal momentum. That said, we have limited visibility and share our customers' uncertainty over how current trade policy may impact demand in 2025. However, Fastenal has historically been able to win market share during periods of disruption on the strength of our nimble sales, our frugal and adaptive culture, the weight of the technologies and global supply chain resources we can apply to finding solutions to customers' challenges. That is our expectation in the current environment. Now turning to slide eight. Operating margin in 2025 was 20.7%, This is up 40 basis points year over year. Gross margin in 2025 was 45.3%, up 40 basis points from the year-ago period. The improvement was primarily driven by our fastener expansion project, other supplier-focused initiatives, and improvements in customer and supplier incentives. These benefits were partly offset by continued customer mix solution and higher organizational overhead cost. Price cost had a neutral impact on our gross profit percentage in 2025. We anticipate our gross profit percentage for 2025 will be relatively flat with 2024. This will be dependent upon our effectiveness in managing price costs and the degree of macro improvement will also influence the scenario. SG&A was 24.6% of sales in 2025, which was consistent with the year-ago period. Employee-related expenses increased faster than the rate of growth in sales largely due to the reset of bonus and commission programs due to improved financial performance. This increase was partially offset by leverage achieved in all other SG&A costs. We continue to invest in key areas of our business to support growth while managing other costs more tightly to reflect the sluggish business conditions. Putting it all together, we reported third quarter 2025 EPS of $0.29 per share, up from $0.26 per share in 2024. Reminder, we executed a two-for-one stock split in May 2025, The prior year EPS has been adjusted for this change. Now turning to slide nine. We generated $386.9 million in operating cash in 2025 or 115.3% of net income. Despite our investment in inventory, cash generation was above traditional third-quarter levels. The five-year average from 2020 to 2024 was 104.2%. We remain comfortable with the cash generation of our model and continue to carry a conservatively capitalized balance sheet with quarter-end debt being 4.8% of total capital. Accounts receivable were up 12.2%, reflecting sales growth, relatively faster growth to larger customers that tend to carry longer terms, and an uptick in quarter-end deferred payments from our customers. Inventories were up 10.5%, which was an improvement from the preceding quarter, have increased inventory as part of our effort to improve product availability in our selling locations and improve picking efficiency in our hubs. We have added stock to support customer growth and we accelerated some inventory schedules for future delivery into current periods ahead of tariffs. Inventory growth may remain elevated in 2025 as we continue to navigate tariffs and more inflation builds in. Accounts payable were up 143.3%, primarily reflecting the increase in inventory. Net capital spending in 2025 was $54.7 million, down slightly from $55.8 million in 2024. This increase is consistent with our expectations for the full year where we anticipate capital spending in a range of $235 million to $255 million, which is up from $214 million in 2024. This increase is from higher FMI device spending, distribution center outlays to reflect spending on our Utah and Atlanta hubs, and automated picking additions across our hub network, higher IT spend, which includes projects aimed at developing additional digital capabilities and higher spend on vehicles. The increased spend was partially offset by an increase in proceeds from sales of properties. With that, I will turn it over to Dan.

Thanks, Sheryl, and good morning, everybody. And you know, I was sitting there thinking as Jeff and Sheryl were talking, what's kinda nice for me right now is we put up a great quarter. And Jeff and Sheryl, a few quarters ago, would have been really nervous about what they just did. Like, they did a wonderful job talking about the quarter, talking about where we're going. And giving insight to our shareholders on the call as well as our employees on the call. I think, as I was reading through some stuff last night, a few things dawned on me. One was it was ten years ago today that we put out the 2015. And, you know, the PMI was plus 50. We've gone through a year where we'd seen diminishing success. And the afternoon before I'd been named president and CEO, and the first message I had to deliver was a tough quarter. Our sales went negative in September. And as it turned out, they were negative for the balance of the year. And we needed to kind of regroup and figure out where we're going, not the chaos of today. And there were some simple themes that began to emerge. When we settled down. You know, it's a great organization. Great capabilities, great people, but we lost our way a little bit. Some other things that emerged over time was the idea of thinking big about where you're going. Taking steps towards the future, being willing to change and never cling to the past. Because it's comfortable and safe. Figure out where you're going and get there. It eventually chimed into some mantras: Find great people. Ask them to join. Give them a reason to stay. And we just introduced a new one. I liked his phrase. Plan the work, work the plan. I don't know if that's a Canadian thing or a hockey thing. It is there with growth through customer service. But it's pretty darn good and I love it. I would like to say thank you to the Blue team. For the quarter we just put up. Frankly, the last two quarters we put up was nice having a couple quarters above $2 billion where we're enjoying growth again. But I would like to give special mention to several people. To Bill Droszkowski. Thanks for thinking about the organization first. And stepping into the role of leading our national accounts, our contract sellers team two and a half years ago. A big part of the turnaround is the work of your team in collaboration with the network they serve. To Casey Miller, thanks for taking a big load on your shoulders when Bill stepped out of his role. I'm glad we were able to add some resources here in the last three, four months. To assist the effort. But, thanks for everything you've done. To Tony Borsma, thank you for the improvements we've seen in our supply chain over the last year and a half. It helped us tremendously navigating the tariffs of 2025 because it gave us a little bit of a cushion to make mistakes or as we did here in the third quarter, to delay a pricing action because of some uncertainty going on with, okay, what are the courts gonna do? What's gonna happen next? Heck, even over the weekend, there was some noise about what's going on. But the work of our supply chain team gave us a little wiggle room in which to navigate. And then, finally to Jeffery Watts, you stepped into a role. The first thing you did is you got our sales team pursuing a common goal. Challenge us to maybe stop being stupid some of the time on the things we were doing and remember we all serve our customers, and we serve each other. Nobody serves us. It's never about us. Never about I. It's about the customers in the market we serve. I did like the other quote Jeff had in his prepared remarks. Drive growth through technology. You know, a decade ago on that call, we couldn't have made that statement because we didn't have a technology to present. We didn't have a technology team to present. And, my compliment, John Soderbergh on your efforts over the last decade. To get us to where we are today and the resources we have to assist our sales team. Page 10 of the field message on the third quarter talks about an item that we mentioned actually on Page two of our earnings release. If you look at Page two of the earnings release, we've historically talked about three categories of products: fasteners, safety, and other. Within fasteners, we further break it down to OEM fasteners. And MRO fasteners. We started doing that some years ago and we did it by guesstimating the mix. We didn't have great reporting to tell us, but we did know that if it's a manufacturing transaction, we aren't charging sales tax. It's an OEM fastener. And so in there, you'd see about 19.8% of our sales are an OEM fastener. That's really predicated on looking at the US business and estimating it. On page 10, what of the flipbook, what you see is our folks we have better reporting systems now, and we can look at things differently, and we can look at it globally rather than, you know, kinda faking it because we're looking at nontax sales. That 19.8 is actually 20.9. And that's looking at it globally. In places like Mexico, bring the average up in, as we've gone through the year, one of the things we've talked about is our Americas business outside the US, particularly our business in Mexico. Having a tough year. That business is more heavily skewed towards OEM business. Especially OEM fasteners than the rest of the company. And when you have a sub 50 ISM, it beats them up. But we have great people down there doing great things. And I know we're building for the future. And that future will shine through. What we learned in this process of really going through, we want to understand the non-fastener business because we had no visibility of that in the past. If you'd asked me six months ago, what percentage of our business do you think is OEM? I would say, ah, it's probably about 30%. And the difference between the 20 and the 30 would be about a half of it would be, metalworking. And abrasives. And half of it would be everything else. As you can see from the information here, I was woefully understated in my number. And so as we move towards year-end and in each of the steps between now and then, an ask I have of the analyst community. When you're having conversations with Sheryl, and Kevin, about our monthly sales, about the follow-up to this call, challenge us on what you wanna see from this information. It's our intent to replace that table on page two or to supplement that table on page two. I'm not sure which at point. With a thought process of our business of here's our direct business. I.e., OEM, here's our indirect business, i.e., MRO. And give better visibility to what we're doing and where is our success taking us. As we move forward. Speaking of moving forward, I'm, can we switch over to the questions. I've used up my ten minutes. And I would and as mentioned, please limit your questions to one. With a follow-up. Thank you.

Thank you. We'll now be conducting a question and answer session. You may enter the question queue. And as another reminder, please ask one question and one follow-up to return to the queue. Our first question is coming from David Manthey from Baird. Your line is now live.

Alright. Thank you. Good morning, everyone. My question is on pricing out of the gate here. So the gross margin looked good. I assume there's no issue with you passing on price. But with the pricing being below expectations, I was wondering if you could talk about the mechanics there, the housing wise that is panning out slower than you originally thought.

You know what? Dave, good morning. As I mentioned, when we were stepping into the quarter, we thought our cadence would be a little different than it played out. And, you know, every time we have a conversation like this, we're answering based on what we know at this point in time. And as you know, it's a pretty fluid environment. We ended up delaying it about thirty days. Our third quarter step. And in doing that, two things happen. Obviously, the benefit or the impact on the quarter is muted. However, by delaying it thirty days, I think we had better discussions with our customers. We had better options for them to have. I believe when you're pushing things too fast, you kind of negotiate differently. You have discussions that are different, and there's probably some territory you'd seed in that discussion that thirty days later when you have a little more insight and can have a more thoughtful conversation, you're probably more effective at your pricing. But more importantly, you're more effective at providing counter options to avoid part of the price through substitution. But it did slow down our cadence in Q3. As we step into Q4, as Sheryl mentioned, we've lowered that number a little bit. Part of it, when we gave that number for Q4, in the July time frame, part of it is, you know, you're doing the straight line look. And you don't really know what it is. The only difference between now and then is we know what we know now, and that is it's gonna be a little bit lower than we thought. Which is frankly a good thing. Because it tells me we've probably put in more substitutions in place. And you know, I cautioned in July about we might get a little bit of margin squeeze in the third quarter. Part of the reason for putting that message in the call is I thought it could happen. I wanted everyone of the Fastenal employees to hear it. I'm gonna make the same comment again. Could get a little margin squeeze in the fourth quarter, because costs are continuing to rise, and we've had some wiggle room because of what we talked about on the expansion of fastener product. That we stock in inventory that gave us some margin on some other products unrelated to the price. But, we could get a little squeezed in the fourth quarter. We're gonna work to avoid it like ever. But we think the number's a little bit lower. Most of that is because we have better information now than we did three months ago.

Got it. Thanks, Dan. And so, when you're saying the numbers coming in a little bit lower, you're talking about the fourth quarter down from the 5% to 8% you thought previously. But is there a change in how you're thinking about peak pricing ultimately? Or does that 5% to 8% just get pushed into 2026 at some point?

You know, I don't know if we know that answer at this point, Dave. There's going to be things that happen. We're going to do pricing actions every quarter. If the situation dictates it, you know, yeah, the optimist in me would say that, you know, things are calming. We had an economist come in and talk to our board the other night. And she was running through some of that stuff. And talking about what their expectation is coming into 2026. And, you know, you know how it is. You ask 10 economists the question. You're gonna get 12 opinions. But I think there is a feel, and I think there's a political will that that's get some of this stuff calmed down. Obviously, over the weekend, there was some noise going different directions. We'll see how that plays out. As we move into November. You know, the optimist in me would say, maybe the point we get to by we exit the year is the point we've gotten to. And now the real challenge is the fatigue on pricing is there. Doesn't mean there won't be some price changes after the first of the year. I believe there will be. There might be some that didn't agree to a price change three months ago or six months ago. That we have to go back and have that discussion again. Hopefully, the end result is we're better at pivoting sources of supply and the products served because I believe we're better at that than our peers because we have direct conversations with our customers. And we have great line of sight to supply chain.

Thank you. Next question today is coming from Ryan Merkel from William Blair. Your line is now live.

Hey, everyone. Thanks for the question. Good morning, start with the bonus reset. Can you just explain why was the bonus reset so much larger in 3Q versus February?

So there's a few aspects to that. One is the part of it's bonus reset. You know, in early August, when we had our after we've gotten the July numbers, we had a bit of a discussion with our leadership team that said, hey. SG&A is getting ahead of where we need to be. And there's a number of things that kick in. In fact, this morning on the, we always have a call at seven in the morning with our leadership team, and Cheryl runs through some analysis she provides for our board and shares it with our leaders. And in that discussion, I was doing some ad hoc calculating. And for the Fastenal leadership listing, I was wrong on my ad hoc. Because I was doing it on the fly. Matt Rantzenberg reminded me afterwards that, hey, Dan. We split our stock. So your math was off by a factor of two. So, if you think about it on a district manager, by district manager basis, we spent about $8,000 a month too much. Yeah. Because that would have gotten us closer to 30¢ if you do the reverse engineering on the math. And our district managers have been under incredible pressure for the last two years to manage expenses. They probably had some pay increases they needed to do. And there's probably some pay increases that were occurring as we were going through I'm talking about base pay. That we're going through the year. And we probably underestimated that a little bit. As we went through the second quarter, and we were realizing more success. There was also some changes that we talked about on some pay programs we were making. And most those programs center on the field. And they center on at what line you're measuring for pay purposes. Are you measuring at the sales line, the gross margin line, the operating margin line, what we internally refer to as the ROA, which is our internal P&L and asset document. A little bit more of an impact from some of those changes because we were discovering success than maybe we estimated. And then but the final mechanical piece is we have a lot of programs that are linked to performance of P&L growth and we pay out a meaningful piece. And you know how our proxy works. We all get a piece of the earnings growth. We had a few more months of success because we have better participation across the network. So you had a few more district managers that are programs are kicking in. District where programs are kicking in. And we underestimated number a little bit. If there's nothing in there that I'm gonna lose sleep over, other than cautioning everybody in August to slow that down. It really matters for '26. Because it doesn't do anything for Q3. It really doesn't do much for Q4. Because it's a big ship, and it requires a little more time to do some steering. On that rotor. But part of it was there was some base pay changes going on. We probably underestimate a little bit the impact of some of the new programs. And then the rest is we're finding success and we're paying. And we think that's a great thing.

Okay. Yeah. Makes sense. And then the follow-up is SG&A in the fourth quarter. Is it going to be similar, 11% year over year growth that we saw in 3Q?

Tell you what, I'll defer that a little bit to some of the follow-up questions when you're going through your model. But we anticipate from the profit growth perspective will continue to kick in until we anniversary that as we move into the second quarter of next year. But you're gonna see similar expense growth, what you're thinking.

Thank you. Next question is from Tommy Moll from Stephens. Your line is now live.

Good morning and thank you for taking my question. Good morning. Wanna start off with a question on demand. Clearly, the broader market conditions remain sluggish. You've called out trade and policy uncertainty as reasons. I'm curious what you're picking up from the field. Does it seem like if we had greater policy uncertainty, there's some pent-up demand that can unlock relatively quickly, or is it more, you know, we're already talking about calendar issues in December production plans feel pretty well set. And even best case, we're probably talking about a 2026 potential tailwind here. Thank you.

Yeah. I would just add into that that we're not seeing a lot of, obviously, the tailwind today, and from everything we're hearing from our customers, everything we see, we're probably looking into, obviously, in the '26. We're not gonna get that in Q4, but now most of the nice part about it, almost all of our customers are telling us the same thing that this year is what it is, but they're spending even in Mexico, they're really looking at that Q1, Q2 time frame. And, actually, Dan mentioned that The Economist Everybody's right. They said the same thing to us.

Thank you. And then just a question on the fastener stocking initiative that you've talked about. Maybe this is too simplistic, but is the rationale here share gain through better service levels? And if that's a fair characterization, and everything goes right, should this be accretive to ROIC, and what's a reasonable time frame for that to unfold?

Well, I'll talk about the share gain on it. And really, you think of it this way, we got a little tied on our inventory models. And what it did was made it very difficult in the field, for the branches to get standard inventory. They weren't efficient at it, and we started to lose some share. So we brought back the standard inventory that we were missing. We've actually increased it, and it's just made it a lot more efficient for our branches and our customers, to get that inventory. I'll let Dan answer the second part.

On the ROIC, actually, the phase one and most of phase two is accretive to ROIC. And because what happened is to Jeff's point, having the inventory on the shelf just meant that it's easier for our folks to perform, it's easier for us to folks to give a quick answer to a customer of, yep. I can get it in as opposed to, doing a sourcing exercise and then calling the customer back. Because a lot of things can happen during that sourcing exercise, like maybe talking to three other suppliers because they need stuff. And if I can just answer the question, it puts it to bed. So there's capture of market shares you get. The other thing that happens is when you buy it in an orderly fashion, you always purchase it better. And so we're getting a nice return. When I look at the inventory dollars we added, the return on that is much better than ROIC as a company. The reason I say accretive and not ridiculously accretive is there's always a trade-off on efficiency. So we've given Tony and his team the ask of saying, keep looking at this kind of stuff. Bob Kurland always taught us, it's not about the P&L. It's not about the pretax the percentage of sales. Now that really matters. Don't get me wrong. It's about the returns. That's what our long-term that's what our shareholders will reward us for as is the returns on the investments on the decisions we're making. And if we're adding inventory, and it's enhancing our returns, we will continue to add inventory even if we add a few days to our inventory, if we can get a return on that, that's a better use of excess cash than even than a dividend. A dividend is you're throwing in the towel because you have more cash than you can deploy in a useful fashion. And what we've always believed in is that companies that have too much cash and they look for places to deploy it, usually destroy shareholder value. They don't create it. So we would rather dividend everything out unless we have a known need for it. And count on future cash flow to fund the ideas that we have.

Thank you. Next question is coming from Nigel Coe from Wolfe Research. Your line is now live.

Hello, can you hear me?

Yes, please proceed.

Okay. Great. Good morning, guys. Sorry about that. I'm not sure what happened there. Dan, can you maybe just expand on the price fatigue comments? I mean, I don't think it's particularly surprising, but I'm just wondering is this really just the uncertainty around tariffs? You mentioned the kind of litigation around that. Is there sort of a pickup in competition here and you're seeing some of your competitors are not pushing through price perhaps?

Our competitors are pushing through price. The marketplace is pushing through price. We actually prefer not to push through price. We prefer to push through growth. We prefer to have conversations about technology we can deploy to your point of use. That lowers your consumption. Expanding the universe of what we're selling, the price conversation is only about costs are going up in your supply chain. And price is how a customer realizes that. And so we've always been reticent. On the flip side, we have great line of sight to our needs, and we have open candid discussions with our customers about what's happening in their supply chain. And that price is part of it. The biggest, I think, complexity to the conversation is things like what's the court system gonna say about it? What's the pivot in the political wind of chaos or is it settled down, it isn't so much what the prices reset to. It's are the prices done resetting? So customers can make decisions about what they wanna do. Because they know the economics of what they wanna do. And in the meantime, what happens is you get kind of a pause. And, you know, and I think that shines through in the comments The Economist said to us and Jeff was alluding to. Is that, you know, customers are doing what they need to do, but they aren't necessarily doing more than they need to do. Because they aren't building for the future because they're not sure what their cost structure is gonna be. And if they wanna do that thing. But the price fatigue is, you know, we all get tired of talking about that because we'd rather talk about growth.

Yeah. Okay. Thanks, Dan. That's really helpful. And then just a quick one, maybe for Sheryl. Just to maybe can we just put some boundaries around 4Q gross margins? I mean, you mentioned the potential of a little squeeze in the fourth quarter. I'm just wondering if there's any sort of more refined comments around that.

Yes. So in the fourth quarter, we are expecting that we'll see a drop in our gross margin, which is consistent with quarter four performance historically. But we are still targeting that we will be flat on our gross profit percentage for 2025 when compared to 2024, and that's really driven by the faster expansion project promoting our gross margin.

If somebody would ask me in January with all the chaos going on, what's a win in 2026. I would have said, getting our growth to double digit as it moves through the year, and if we can maintain a gross margin, a flat gross margin in this environment, I think that's a huge win. And part of that was didn't appreciate how chaotic the year would be on tariffs. I don't know if any of us really did. And secondly, I did I knew mathematically how much the faster expansion could help us, but knowing mathematically how much it's gonna help and realizing that in actual activity aren't always the same two things.

Our next question today is coming from Stephen Volkmann from Jefferies. Your line is now live.

Great. Good morning, everybody. Dan, maybe can we go to your slide 10? And I'm curious how you use this data. Is this percentage something that you're trying to manage to either grow it faster or not, I guess, to the overall business? And I'm curious if there's any I'm assuming the margins are higher in this area, but any commentary there would be great.

Actually, the margins in direct materials are lower, but your cost structure is lower because it's planned activity. Here's how I use it, and I'm gonna think out loud. And, Steven, thank you, for that question, by the way. But I'm gonna think out loud. So if you're writing these down, use a pencil. Instead of a pen because as the information becomes more available, to you and, frankly, to us, some of these things might be conceptually dead on. They may be off by a little bit. So when I think of the PMI going sub 50, in November 2022, and our business falling off as we got into 2023. There's obviously a cause and effect there. And the PMI and the industrial production, subset of information that we've historically talked about internally. When I look at that, even we didn't really understand how much of this was production shutting down versus we're just not executing or we need to get our head out of somewhere and get executing. And what this gives us insight if we appreciate that 40% of our business or 38.8. Excuse me. But almost 40% of our business is direct material production related. The story that subset of information tells I suspect we'll have a strong correlation to industrial production and to the PMI in general. I also believe that close to you know, we talk about 45.3% of our sales go through FMI. I suspect on that piece of our business, probably 50% of that business goes through FMI. We don't know the answer to that right now, but that's what I suspect it'll be. When the dust settles. Then the other 60% are indirect. It's truly MRO spend. That's really a good comparison benchmark to some of our peers that are more MROs centered businesses. It's a good comparison to the things we're doing to broaden our breadth of customer base because that's less impacted by the PMI, less impact it's impacted, but less so as far as industrial production as well because you know, 8% of that business is going into supplying e-commerce distribution. 8% of that business is going into the government and sector where we're supplying their needs. It really has nothing to do with PMI. And we believe about of that 60% that's indirect, we believe about 40% of that is going through FMI. So if you meld those two together and do your math, it's about forty-five. Is the mix. Now time will tell if Dan is full of it on that and if the numbers come in a little bit. We'll learn that in the weeks and months to come. And as we learn that in November with our monthly release, we'll put out some insight on it. If we learn some new things in December, we'll put or in November, we'll put it out with our December release. And then talk about it a bit more in January and a bit more in our annual report because our goal is to provide you with better information for understanding our business, where we're discovering our success, where we're struggling, are the factors of struggle internal i.e., execution, or external, and we're gonna focus on growing our business long term. Always. But we think it provides better insight than purely, hey. Here's fasteners, and here's everything else.

Great. Okay. Thanks. That's helpful. And maybe from long term to super short term, anything in October to call out relative to how we should think about top line for the fourth quarter?

Whenever I use October on the thirteenth of the month, I'm always wrong. So I'll defer that to our November release in early November.

Thank you. Next question today is coming from Chris Snyder from Morgan Stanley. Your line is now live.

Thank you. I wanted to follow-up on the conversation about price. Is this softer is there any impact here from that the producers are maybe just pushing less on you guys? Than you thought previously. And then or when we kinda see, you know, the Q4 step down, is it just that the company is comfortable being underwater for maybe a short period of time on price cost? And does that tell us that it's getting more competitive in the market? Thank you.

We're never comfortable being underwater in price cost. Sometimes that happens. We're never uncomfortable. If we're growing double digits, we don't like our incremental margin to be below 25 but I'm not gonna lose any sleep over this quarter where we're closer to where we're at essentially 24. I don't think the here's what I'd like to think. But this is me just giving an opinion. And, you know, that and $3 about a cup of coffee, at QuickTrip in Winona. But, I believe our duty to our customers is to push back on supply base. Now in the case of things like tariffs, that's a mechanical thing. Now we can push back on our supply base and get price concessions or cost concessions potentially, or we can move business to other geographies and avoid some of the tariffs. But there's trade-offs. You might be paying more to save tariff and that more might be in the cost of product. You know, as a we've diverted product going directly into Canada. So it doesn't come through the US and get the toll. Coming through the US. But it's more expensive for us to break shipments down and divert it to the West Coast of Canada and bring it in that way. But that might be 8% more expensive, but if tariffs are multiples of that, you choose to do that. Because it makes the most sense. I would like to think that producers also realize that if you use tariffs as a means to we're very, very surgical with our tariffs. Some companies aren't so surgical. They're just like, hey. We're just gonna raise prices x to everybody. And when somebody does that, a supplier of ours does that, we'll say, you know what? You can set your pricing where you wanna set it. The marketplace is gonna decide where it wants to source its product. And if you're not being surgical, we're gonna punch you in the face. And we're gonna take that product sourcing somewhere else. And I'd like to think some of those activities, and I'm being I'm not being literal with that comment. I like to think some of those activities cause pause of our supplier base to you know, the old adage pigs get fed, hogs get slaughtered. Don't be a hog. Figure out what you need surgically by product based on cost components, but don't do a broad brush on this. And perhaps you're seeing some of that but we will never be comfortable with price cost being anything but neutral.

Thank you, Dan. Really appreciate that thoughtful answer. Maybe just following up, you mentioned earlier about making in inventory and not providing a great return. Do you think customers did anything similar in the first half of the year? There's very well flagged telegraphed price increases coming. Do you think there was any pulling forward of inventory at the customer level? Just to get ahead of that? Thank you.

I can't speak to supply chains that don't come through Fastenal. Because I'm sure there's customers that bought some components because they knew what their needs are, and they bought some, assuming they can get them in. And they can get produced and get them in before the toll started charging. But I don't believe they did any of that activity through us. Because we're a real-time supply chain partner for them. That's the value we bring. And what we do broadcast to our customers is things we're doing so we can tell them, hey. Here's how many weeks of supply we have of your part. And here's where the cost increase is gonna kick in. And the price increase to you. So I don't think our customers did in the products we sell. I can't speak to products outside of that. But with that, I see we are two minutes to the hour, so that will be our last question. Thanks to the Blue team for everything you did. I would share with the group sorry if I've been a little bit unavailable the last couple weeks. My 95-year-old mother passed away a couple weeks ago, and she lived a wonderful life. Time takes its toll on all human beings, and I'm really glad that my four children, particularly our daughter Anna, who's 20 years old, had a grandmother who lived long enough that she was part of her life, and she knew her as a human being. Thanks, everybody. Have a good day.